Question

Company A is considering buying the assets of Company B in a taxable transaction. Please consider what the income tax impacts are for the following issues:

1. Treatment of acquired assets by Company A.
2. Tax treatment of sale to Company B.
3. Tax Treatment of sale to shareholders of Company B.
4. Transfer of net operating loss carryforwards and tax credits of Company B to Company A.

Answer 1

Answers:

a)Treatment of acquired assets by Company A: Company A will be getting depreciation allowance on capital assets acquired and thus saving income tax.

b) Tax treatment of sale to Company B: Company B will be liable to short term capital gain(STCG) or long term capital gain(LTCG) on capital assets sold and accordingly liable to pay income tax on that capital gain as per Income Tax Law applicable in the respective countries. Further Written Down Value of Assets and Salvage Value will be considered for calculation of STCG or LTCG Gains. Further there is always result a short term capital gain in case of Depreciable Assets.But in case case of Non-Depreciable Asset, either short term capital gain/long term capital gain may arise based on period of holding of respective asset by company. There will also be a tax implication of Deferred Tax Asset or Deferred Tax Liability for Company B.

c)Tax Treatment of sale to shareholders of CompanyB: Same treatment as above.

d) Transfer of net operating loss carryforwards and tax credits of Company B to Company A: While computing the Taxable income of Company A for the purpose of Income tax purposes, the net operating loss of Company B will not be considered for the above purpose. It is assumed as per the above question that the Company A has only acquired or bought the assets of Company B but not acquired Company B or merged with it. Hence the Net Operating loss carryforwards and tax credit of Company B has no relevance and will not come in the books of Company A.

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